29 September 2008

For reading material on the plane to Sydney on my recent holiday, I printed out Antal Fekete’s series of Monetary Economics lectures. Illuminating. During my holiday, I also got involved in a discussion on the Kitco forum about the silver shortage. On my return, sitting in my study, Antal’s work and the discussion got me thinking about what motivates those in the "gold community".

Scanning my bookcases my eye fell on two books: one I have read - Paul Hawken’s The Ecology of Commerce (1993) – and one I have only skimmed but been meaning to read - Lewis Mumford’s The Myth of the Machine: The Pentagon of Power (1970). What these two books share with Antal’s work is a strong moral sense, specifically that there is something wrong with the way society works, and a focus on making it better. The best gold advocates (I prefer this term instead of “goldbugs”, which implies emotional irrationality) I feel have this moral element to their work. It takes the form of a belief that fiat currencies, which lack any limits, are detrimental to society. This concept of limits also appears in Paul’s, Lewis’ and Antal’s work.

For Paul, economics needs to take account of, and operate within, the ecological limits of the planet: “the commercial systems of the future must be more like biological systems – self-sustaining, non-wasteful, self-regenerating.” Population and production cannot continue to grow forever, to do so means they take on the characteristics of something else that has no limits on its growth – cancer.

Lewis’ book deals with the dehumanisation of modern technological society and the aggregation of power. He advocates “a displacement of the mechanical world picture with an organic world picture.” His use of biological/organic systems as a model for a sustainable society is something he shares in common with Paul. What I find interesting about organic systems is that they are self-regulating, self-limiting. This I think is ultimately what Antal’s work on a gold-based monetary system is about – using gold as a monetary control mechanism.

Why is this important? Lewis notes “... the increasing translation of both political and economic power into purely abstract quantitative terms: mainly, terms of money. Physical power, applied to coerce other human beings, reaches natural limits at an early stage: if one applies too much, the victim dies. ... But when human functions are converted into abstract, uniform units, ultimately units of energy or money, there are no limits to the amount of power that can be seized, converted, and stored. The peculiarity of money is that it knows no biological limits or ecological restrictions.”

In this analysis, then, if there is no control over abstract money, then there is no control over power accumulation. Lewis goes on to conclude that the power complex’s “... final goal is quantitative abstraction – money or its etherialized and potentially limitless equivalent, credit. The latter, like the ‘faith’ of the Musical Banks in Erewhon, is at bottom only a pious belief that the system will continue indefinitely to work.”

A key aspect of Antal’s work is the power that physical gold money gives the consumer, the average person, over the monetary system. Without the ability to redeem gold, without the ability to hoard gold, there can be no control on power: “When a currency is redeemable in standard gold coins, any individual disturbed by the behaviour of the government or banks can attempt to protect himself by presenting for redemption such paper currency as he may command. It is this power of individuals that holds, or tends to hold, banks and government in check.”

Lewis also makes another interesting observation about the resemblance between the pleasure centre in the brain and the power complex’s obsession with profit and “indifference to other human needs, norms, and goals”. He cites a study where electrodes were inserted into the pleasure centre in laboratory monkeys and control of the current, which stimulated the pleasure centre, was given to the monkeys. What occurred was that the monkeys would continuously press the current regulator, regardless of any other physiological need, even to the point of starvation. He concludes that “the power complex seems to operate on the same principle. The magical electronic stimulus is money” and that both “recognize no quantitative limits ... the abstraction replaces the concrete reality, and therefore those who seek to increase it never know when they have had enough.”

Antal’s insistence on the use of physical gold in the monetary system removes the abstraction, provides the quantitative limit. If “money has proved the most dangerous of modern man’s hallucinogens” according to Lewis, then Antal is suggesting we need to go cold turkey (or is that gold turkey).

Being a practical person, while reading Antal’s work I kept thinking how to turn the theory into practice. The problem is more than one of mechanics, is it one of politics, of public perception. Also, considering the entrenched position of those who benefit from the existing system, how to effect change that will threaten them. Lewis has something interesting to say on this:

“... there is so little prospect of overcoming the defects of the power system by any attack that employs mass organization and mass efforts at persuasion; for these mass methods support the very system they attack. The changes that have so far been effective, and that give promise of further success, are those that have been initiated by animated individual minds, small groups, and local communities nibbling at the edges of the power structure by breaking routines and defying regulations. Such an attack seeks, not to capture the citadel of power, but to withdraw from it and quietly paralyse it. Once such initiatives become widespread, as they at last show signs of becoming, it will restore power and confident authority to its proper source: the human personality and the small face-to-face community.”

I cannot think of a better description than “animated individual minds ... nibbling at the edges of the power structure” for what gold advocates are all about.

09 September 2008

Interesting article by James Turk about US Mint inability to meet demand for gold coins. He notes that the US Mint's reported working stock has remained at exactly 2,783,218.656 ounces since April 2006. Now I agree with him that this is unlikely, but in addition to his suggested reasons:

* Maybe the Treasury does not want to part with its remaining gold at these current low prices.* Maybe the Treasury does not want Americans to exchange their fiat dollars for the safe haven of gold as the central banking fiat money scheme implodes.* Maybe the Mint doesn't have any gold because the 2,783,218.656 ounces were loaned out.* Maybe the Treasury doesn't have any gold either.

I would like to propose some more mundane reasons:

* Some linking formula in a spreadsheet broke and the government official responsible for putting the numbers together didn't notice it because they don't give a stuff.* US Mint realised it is competitively sensitive information and don't want to supply it anymore (should still disclose that in the noted to the figures).

Out of interest I used the fms.treas.gov online enquiry and let them know about the discrepancy. No reply as of yet, will be interested to see if I get one or if the numbers get fixed. Will let you know what happens.

07 September 2008

Two scenarios are receiving increasing attention in assessments of the US economic outlook – inflation and deflation. Some assessments favour a combination of both – such as a severe deflation followed by inflation, or hyperinflation. Others feel that successive development of alternating deflationary and inflationary periods of increasing intensity is more likely, leading ultimately to a collapse of confidence in the US economy.

With the inflationary scenario, the rise in total US debt becomes so extreme that the level of interest rate required to attract ever higher international capital inflows seriously damages GNP growth. Faced with this dilemma, the Federal Reserve will have no choice but to relax its policies (as it is currently doing), and expand money supply with ultimately inflationary consequences. The interest rate reductions will debase the currency by allowing the real value of debt to be inflated away, a collapse in support for the USD abroad, and together with a retreat into gold by many USD holders.

With the deflationary scenario, proponents see similarities between the 1930s and the current situation. In their scenario, the debt explosion becomes too large to be serviced in many parts of the economy. Asset liquidation becomes endemic, forcing prices down, creating debt deflation in a vicious downward spiral with continuing attrition of debt collateral. Personal incomes and consumer confidence plunge, causing a contraction in spending. As faith in the USD evaporates, there is a flight into gold and other safe haven currencies.

The position of the USD as the major international reserve currency is pivotal to the unfolding of either scenario. The prospect of currency debasement through a monetary reflation by the Federal Reserve would undoubtedly provoke a flight from the dollar by foreign investors. Such a flight would cause a quick reversal of Federal Reserve policy and a surge in domestic interest rates, in an attempt to maintain investor confidence. This move would eventually undermine the corporate sector by raising debt servicing costs in an economy in recession, thereby ultimately triggering a credit collapse with consequent deflationary effects.

It is not possible to prove or disprove these theories and scenarios. Nonetheless, it is sufficient to note that the US has been on a track of increasing financial instability for 40 years and that inflation has been checked only by periodic credit crunches which have triggered debt crises, followed by another round of monetary stimulus.

Nevertheless, the evidence now accumulating in the financial and banking sectors suggests that the outcome is more likely to be a deflationary depression. There is no evidence of new developments in the US economy at this time that might transform international disinterest in the USD. Consequently, the US deficit will have to be internally funded in the future – unless the authorities choose some unforeseen strategy such a mobilising US gold reserves into gold swaps. The question is, however, whether internal funding is a practical option under the circumstances?

The old remedy of inflating out of this predicament by issuing cheaper and cheaper money into the banking system simply will not work this time. The reason is simple – the country is already awash with too many debtors.

Corporations, individual, and the Federal government are already suffering from a gigantic surfeit of debt, from the highest debt total to GNP levels in recent US history. The Federal Reserve can no longer make the inverted debt pyramid grow because the debtors in it are too illiquid – they are unable to go further into debt – no matter how attractive the authorities make interest rates. The lever of expansionary money has been pulled once too often. The next phase will be the rapid descent of investors down the inverted debt pyramid from illiquid assets such as property into quality money – including gold – at the inverted apex. This phase will be prompted by a collapse in confidence in the dollar – triggered possibly by the collapse of a major bank, the stock market, and/or the bond market.

In any case, as it is made clear above, the situation now emerging has all the hallmarks of an insoluble dilemma for the US authorities. Against the background of the global capital crunch, the decline of foreign savings to fund the increasing deficit, the growing global economic contraction, the deflationary or inflationary scenarios are both insoluble. There are no solutions that do not involve a dramatic transformation of the USD in international financial markets, and its role as the reserve currency. Both scenarios ultimately lead to a flight to quality money and liquidity, out of the USD and into gold and other currencies.

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Unfortunately I cannot take credit for the insightful words above. They were written by my former boss - Michael Kile. What is shocking is that they were written in February 1991, one chapter in a 40 page document titled "The case for gold in the 1990s", published by the Perth Mint.

Consider that I had only to remove a few sentences (which included giveaway dates and figures) for it to read as if it was written in 2008. It is worth re-reading it with the understanding that the analysis is 17 years old and realise that during those 17 years the US got away with "the old remedy of inflating out of this predicament by issuing cheaper and cheaper money".

The question is: will the US get away with it this time, or will Mr Kile be finally correct that the old remedy "simply will not work this time"?

05 September 2008

From the start, I’d like to direct readers to my About This Blog. As I say there, my blog is not a Perth Mint mouthpiece and all my comments are my personal opinion and not endorsed by the Mint in any way. If you have a question about their operations or a complaint, ask them directly yourself, I am not their complaints department.

It is also probably important to be clear that I am bullish on gold and silver, although I take a long term view. If you sense I’m taking a bearish view that may be because I am a contrarian personality type and thus have a tendency always to look at the other side of any dominant view (and challenge my own views), as I believe the truth usually lies between the extremes.

Jason writes: I also think its normal for there to be shortages of silver and gold when inflation is raging out of control, and when the markets are manipulated, but I suppose we don't agree on reasons like that.

The comments I’ve made don’t exclude inflation or manipulation as factors. It is unfortunate that many have no confidence in COMEX; thankfully Australia does not have any precious metal futures markets. All I’m looking to do is to contribute some additional things to consider that no one else in the “gold internet community” talks about. Some of these factors may be important to the shortage of (retail) silver, some not so. It is just extra information that I hope fills out the picture, as no one knows everything.

Jason writes: That's insane. Right downstairs, they often run out of 100 oz. bars, and reportedly have no 1000 oz. bars for sale.

I asked our Shop if they have 100 oz bars and they said they have them available, so instead of relying on Jason’s “reportedly”, all I can say is that if you want to buy silver, ring our Shop up and buy it. Once your money clears, they'll ship. At the end of the day, my words and Jason’s words don’t matter – actions speak louder than words. And the only action that matters is delivery. Period.

Jason writes: Besides, that's a lie. Wholesale quantities in silver are 1 silver futures contract of 5000 ounces, which is about 1/6th of a tonne, not 20 tonnes! Further, I note that Nigel did NOT say he would SELL 20 tonnes of silver. He only wants to "deal" in that, minimum. He probably needs to buy that much to pull his fat out of the fire, as I will explain below.

The definition of “deal” by Encarta Dictionary within Microsoft Word is “an agreement, arrangement, or transaction, usually one that benefits all the parties involved”. This includes BOTH buying and selling. But to be clear, Nigel will SELL physical 1000 oz silver bars. Also, what I said was "he will do deals for a minimum". I did not say that "the wholesale market only deals in this minimum", you read that into my statement. That is just his minimum. He is the Treasurer for the whole Mint, not a retail bullion dealer; this is the deal size he operates at. Of course trading occurs in the wholesale market for quantities lesser than that. My point was that bulk quantities of silver are available in the over the counter (OTC) spot market. They are, and Nigel will supply them. Period.

Jason writes: AGR Matthey closed their silver operations!

Incorrect. AGR Matthey have not closed their “silver operations”. I quote from a letter dated 18 August 2008 to AGR Matthey’s customers:

“The Board of AGR Matthey has taken the decision to exit the jewellery business. AGR Matthey will no longer manufacture jewellery products in Australia or New Zealand. … The industrial business (medical and brazing alloys) will continue. … Arrangements are being made for fine gold grain (minimum order quantity 1 kilogram) to be made available through Perth to wholesale customers with delivery via Brinks premises on the eastern seaboard, provided there is sufficient demand. Larger secondary refining customers may be serviced through the refinery in WA.”

AGR Matthey refines around 10% of worldwide mine production and silver is a by product of that refining. It is not reliant on sourcing gold or silver from the general public. Australia is a net exporter of precious metals – in 2006/07 Australian mine production was 1674 tonnes with 431 tonnes of refined silver exported according to ABARE. Logically this means that there is enough silver to meet domestic demand.

Since the rest of your article with its “might have been” type speculations hinge on this error of fact about AGR Matthey, they are also incorrect and thus don’t warrant a response.

The Perth Mint’s unallocated facility is not the be all and end all of the organisation; the Mint sells bars, coins, numismatic products, unallocated storage, allocated storage, and an Australian Stock Exchange listed gold product – however customers want to buy their precious metal, the Mint strives to service it. Is the Mint perfect? No. But everyone who works there is passionate about precious metals and supporting the industry and is proud to work there. And so am I.

03 September 2008

Jason Hommel has made some comments to my blog of 31 August that I think are important. His questions/statements are in italics and my replies below.

Yes, but where do you sit? Where are those 1000 oz. bars that kitco and perth can't seem to be able to find for customers who want them? Why do Perth/Kitco have a shortage of 1000 oz. silver bars?

It may not be clear from my blog that I work at the Perth Mint. I have updated my profile to include my LinkedIn profile and “About This Blog” link to be clear in what capacity I do this blog. I have also included a picture of my favourite new coin, it is a Good Fortune coin.

When I say that wholesale bars are available, it means in wholesale quantities. I cannot speak for Kitco, but I went upstairs and spoke to the Treasurer and he will do deals for a minimum of 20 tonnes of silver and 1 tonne of gold. Call Nigel Moffatt on (08) 9421 7403. Price will be on a deal-by-deal basis.

Depository have 1000 oz and 100 oz silver bars in stock for their clients to convert to allocate or collect. If you are a Depository client you have their contact details.

I also walked downstairs and spoke to the manager of our retail shop and they sell 100 oz bars for silver value + $74 per bar. They don’t really deal in 1000 oz bars because they are odd weight which doesn’t work well with their retail computer system and they are bulky, but I assume that most would rather 100 oz than 1000 oz anyway. Call Cathy or Liselle on (08) 9421 7428.

(Aside: while you may define collusion as something illegal, others may define it as anything that is against free market principles.)

The definition I used came from an online dictionary. See http://en.wikipedia.org/wiki/Collusion for another definition. The key elements are “secretive” and “fraud”. It does not mean “against free market principles”.

I would like to trade bullion in a free market manner, but it seems most everyone else want to "lock in" a guarantee of some sort or another.

I think it is entirely in keeping with free market principles that person A and person B have the freedom to enter into any agreement they see fit that does not hurt anyone else’s rights. There is nothing stopping person R (for retail buyer) from offering a higher price to A to secure supply of A’s silver. Anyway, even if A has committed to supply silver to B, there is nothing stopping B from selling that so acquired silver to R via auction or at a higher price.

The agreement between A and B may restrict A from supplying to R (which was all I was trying to explain) but not B from supplying to R. I therefore do not see any fraud being perpetrated against R or any restriction of the free market. In the end, the silver ends up in someone’s hands and they are free to auction it off to the highest bidder as you have recommended.

It's been my experience that people in the industry, the coin dealers, over-value their own direct personal experience, and have trouble seeing the big picture. They see the public selling silver to them, and thus, from their view, there is a "glut" … where public buying increased ten fold, and they've been turning away customers, and trying to buy from refineries, instead of sell to them, in all of 2008.There is an expression used to describe such a viewpoint. They can't see the forest because the trees are in their way.

I suppose I agree with you, but not sure this is a problem. The coin dealers operate at the end of the precious metal industry value chain so deal in “trees”, that is their business. You are exactly right, they either see net buying or net selling and either net buy or net sell from/to their source of product one step up in the value chain. This is good because it sends a signal about the volume of demand back to that source. I don’t know that they need to see the forest to do their job properly.